Media  Global Economy  2014.06.24

The Regulatory Reform Council's proposal for agricultural reform

English translated version of "Business Prospect" on NHK Radio Channel 1 on May 27, 2014

1.What is the proposal made by the Council for Regulatory Reform of Cabinet Office in Japan for agricultural reform published on 22nd May 2014?

The proposal of the Council for Regulatory Reform (CRR) concerns agricultural committees, agricultural production corporations and agricultural cooperatives.

The agricultural committees have power to approve buy-sell transactions of farmland and to authorise the conversion of farmland to purposes other than agriculture. The committee members are elected by a vote of local farmers. The CRR proposes that members be appointed by a mayor of the local municipalities so that non-farmers would be involved in the committees' activities.

The CRR also proposes to encourage business enterprises to enter into the agricultural sector. Under the current regulation, only a business enterprise engaging in processing or distribution of agricultural produce can participate in an agricultural production corporation with a maximum equity interest of 25%. The CRR proposes to lift the restriction on the types of business that can invest in an agricultural production corporation and raise the maximum investment ratio to 50%.

The CRR proposes three major changes in agricultural cooperatives (JAs). First, it proposes to delete from the Agricultural Cooperative Law the provisions concerning the national and prefectural unions of JAs (the national union is called JA-Zenchu) which are authorised under the law to advise local JAs. The proposal aims to encourage local JAs to develop their activities independently - a bottom-up approach - not just to follow the guidance of the central or prefectural unions.

Second, it proposes to covert the National Federation of Agricultural Cooperative Associations (Zen-Noh), which engages in the processing and sale of agricultural produce collected from local JAs, into a stock corporation in order to encourage it to be competitive in the global market. Finally, there is a proposal to transfer local JAs' credit and insurance businesses to existing national organisations, and for them to be remunerated by the national organizations for their agency activities. In this way, it aims to make local JAs concentrate on their agricultural businesses.

2.How do you see the proposal?

In agricultural committees, only farmers have the right to vote and be eligible to stand as members of the agricultural committee under the present Agricultural Committee Act. Since they are all fellow farmers in a local community, there is criticism that farmers often have a cosy relationship when it comes to the operation of the farmland regulations. For example, when one farmer intends to conduct a sale of his farmland contrary to the interests of the community, a fellow farmer who is the member of local agricultural committee may feel uncomfortable refusing such a request. Securing farmland is the basis of food security. I support the proposal to bolster the power of agricultural committees in order to find unutilised farmland and intervene in the illegal conversion of farmland. I am also in favour of the proposed amendment to allow the municipal mayor to appoint the members.

As for agricultural production corporations, the present Agricultural Land Act does not allow them to own farmland. The law supports the principle of farmland reform after World War II, under which tenant farmers became land-owning farmers through the distribution of land formerly owned by landlords. The idea of this principle is that farmland should be cultivated by its owner. In the case of a stock corporation, stockholders own farmland while employees cultivate the land. This is not consistent with the principle of the Agricultural Land Act. Therefore, the Act only permits an agricultural production corporation whose equity ratio held by non-farmers (but engaging in certain agriculture-related businesses) is less than 25% to obtain the ownership of farmland. In other words, only corporations that are more or less created from farming households are allowed to obtain the right to farm land.

However, the Agricultural Land Act was amended in 2009 to state that any entity intending to enter into agricultural business is entitled to lease farmland without any limitation on the lessee's non-farmer investment ratio. By this amendment the principle that an owner of farmland should be a cultivator has been partly abolished because the lease is held by stockholders while the farmland is cultivated by employees of the corporation. There are no reasonable legal grounds for corporations not to be allowed to own farmland while they are entitled to obtain lease rights.

That being said, an immediate amendment to allow any corporation to own farmland may be too drastic. The CRR favours a step-by-step approach to increase the maximum equity ratio of non-farmers from 25% to 50%. However, in this proposal people, such as young, ambitious businessmen or non-farmers, who want to enter into the agricultural business by establishing small venture companies because of their lack of capital, still need to provide at least a half of the company's capital by themselves. I think that farmers' investment ratio requirements must be eliminated for venture companies with smaller capital in order to allow a variety of entities to engage in agricultural businesses.

3.What changes are proposed by the CRR regarding the agricultural cooperatives?

There is criticism that although the agricultural cooperatives were originally a bottom-up type of organization, created and controlled by farmers, they are actually controlled top-down by central unions (national and prefectural). I am in favour of the CRR's proposal to review the position of central unions.

In addition, the CRR proposes to convert Zen-Noh into a stock corporation meaning that Zen-Noh would lose its legal status of a cooperative. Zen-Noh, the national federation of the prefectural JA associations and local JAs, is a huge conglomerate which has 80% of the market share of fertilizers, 60% of the market share of agricultural chemicals and machinery, and 50% of the market share of rice. This huge conglomerate is exempted from the Anti-Monopoly Law because of its legal status as a cooperative. It also enjoys various benefits, such as a lower corporate tax rate of 19% while normal companies are taxed at 25.5%, tax-free dividends for members and exemption from the fixed assets tax.

Originally, farmers established agricultural cooperatives to buy agricultural materials collectively at a cheaper price. However, critics say that the exemption from the Anti-Monopoly Law allows Zen-Noh to sell farmers agricultural materials and inputs at higher price. It is said that some local JAs are able to buy fertilizers 30% cheaper through normal market channels other than Zen-Noh. The higher price of materials and inputs do not only have an economic disadvantage for farmers but also ultimately impose a higher food price on consumers. We can expect a decrease in the price of agricultural materials and foodstuff if Zen-Noh loses of the aforementioned privileges and is forced to compete with companies on an equal footing.

4.What about the timetable for the proposed changes?

The government and the ruling party will discuss and finalize the proposal before the end of June. I do not believe that all changes proposed by the CRR will be implemented as they are proposed, but it is of great significance that, for the first time ever, the government has published a proposal for agricultural cooperative reform, a topic which has been regarded as taboo for a long period of time.

(This article was translated from the Japanese transcript of Mr. Yamashita's speech in the "Business Prospect" session of the radio program "First in the Morning News" broadcast by NHK Radio Channel1 on May 27, 2014.)